IPO Basics

Traders base their profits on different kinds of purposes. One may be a long-term investment which is a gradual process, yet may produce high returns. The other can be a short-term strategy which includes trading with quick gains. One such method is Intraday Trading.

How does company ownership work?

Companies can either be:

Privately owned

Publicly owned

Private ownership of a company implies it is totally funded by one or many private entities. A publicly owned company is one which is at least partly funded by the public and traded on share markets. A person or an institution that funds a company is part owner of the company and is allotted shares of the company, bestowing voting rights on the shareholder.

The Company appoints a board of directors based on the majority vote of the shareholders. The board of directors is empowered to make decisions on behalf of the company.

IPO stands for Initial Public Offering, and means just that - a company offering itself (or its shares) to the public. An Initial Public Offering is the first offer of shares made by a private company to the general public. In an IPO, the private company offers new shares to the public in exchange for capital. This capital is then used by the company for growth.

After shares are allocated to the buyers, the company is listed as a publicly traded stock in a share market. Trade on the shares takes place daily, in accordance with the share market’s rules and regulations. The amount of stock in circulation is called float.

Definition and basic terms

Primary Market : This initial sale constitutes the primary market, that is, the initial transaction between the company and public bidders.

Secondary Market : The shares bought during an IPO are traded on the stock exchange where the company is listed. Now, this is called the secondary market.

Float : The amount of shares in circulation is called the float. This is the quantum of shares on which trading can take place in the share market, in other words, the maximum volume of shares that can be traded on a stock exchange.

Market Price and Market Valuation : After the stock is listed on a stock exchange, based on demand for the stock, a share price is reached by the market. This is called market price and this determines the market valuation of the company.

Issue Price : If the issue price (initial price at which share was offered in the IPO) is lower than the market price, then shareholders who bought stocks during the IPO stand to profit and see their net worth rise.

Red herring prospectus : A public document published by the company seeking bids for IPO.

Underwriter : The institution in charge of conducting the IPO proceedings at the behest of the company.

Types of bidding

Issue price - This is the price of one share offered in the IPO as fixed by the company - it is the price the shares begin their life on the stock market with. Two types of pricing options can be involved:

Fixed price - The price is fixed before the IPO opens.

Book building - The price is arrived at after the IPO opens, free market style, depending on the demand for the shares offered.

Float - This refers to the amount of stock that is made public through the IPO. This is the stock that circulates through trade on share markets. Not all of the shares of a company get listed on the market - it’s usually a small proportion.

IPO Subscription Procedure

Make sure the IPO is open to retail investors.

IPOs can be accessed through banks and brokerages that have undertaken to conduct the IPO proceedings on behalf of the company.

You can bid for shares from an IPO either online or offline For offline bids, you've to fill in the specific application form available with banks and brokerages, given that they open up an IPO to their clients.

Attach a cheque for the amount of shares you're bidding for. You need to have a demat account to bid for shares.

Nowadays, offline bidding is becoming obsolete with the advent of online bidding.

You can bid online through the bank/brokerage’s website. Payment for the bid can be made through net banking options.

After the bid is done, shares will be allotted to you in full, or divided up among bidders in case of oversubscription.

The shares are credited to your demat account and a refund is made for the unsuccessful bids.

Types of IPOs

IPOs are how companies get listed on stock markets. To get in on the action, you must be familiar with the IPO investment tips and strategies. You should also know the different types of IPOs there are which is why we’re here to discuss every detail.

Fixed Price Issue : In a Fixed Price Issue, the price of the offerings is evaluated by the company along with their underwriters. They evaluate the company's assets, liabilities, and every financial aspect. They then work on these figures and fix a price for their offerings. The price is fixed after considering all the qualitative and quantitative factors. In a fixed price issue, the fixed price may be undervalued during the company’s IPO. The price is mostly lower than the market value. As a result, investors are always very interested in fixed price issue and ultimately revalue the company positively.

Book Building Issue : A book building issue is a comparatively new concept in India compared to other parts of the world. In a book building issue, there is no fixed price, but a price band or range. The lowest and the highest price is called ‘floor price’ and ‘cap price’ respectively. You can bid for the shares with the desired price you would like to pay. Thereafter the price of the stock is fixed after evaluating the bids. The demand of the share is known after each day as the book is built. An IPO can be done through Fixed Price Issue or Book Building Issue or a combination of both.

Fixed Price issue vs. Book Building issue

Price : The price of the share is fixed on the first day of the listing in fixed price issue and is printed in an order document whereas, in book building issue only the price band is fixed initially, the exact price is not fixed. Only after the closing date of bid, the exact share price is fixed.

Demand : The demand in a fixed price issue is known only after the closing of the issue whereas, in a book building issue, the demand for the share is known after each day.

Payment : In a fixed price issue, you need to pay 100% of the price of the share at the time of bidding for the share, but in case of book building issue, the payment can be completed after the allocation.

IPO allotment basics

The IPO allotment process is fairly simple. Investors place bids for shares. If shares are offered at a particular fixed price (issue price), then all bids are made at that price. However, share price can also be fixed or discovered after assessing demand for the stock by the book building process.

In the book building process, bids are placed within a price range and finally a price is fixed. All of the bids at the fixed price and above get shares. Thus, if you think that there are chances that a particular IPO might be in a high demand, i.e. the IPO might be over-subscribed; it's always prudent to bid for shares at the cut off price. If you choose the cut off price option while bidding for shares, you will get shares at the cut off price determined later on.

But, what happens when more number of bids is received than there are shares? The company then divides up the shares among bidders.

IPO allotment basics

The IPO allotment process is fairly simple. Investors place bids for shares. If shares are offered at a particular fixed price (issue price), then all bids are made at that price. However, share price can also be fixed or discovered after assessing demand for the stock by the book building process.

In the book building process, bids are placed within a price range and finally a price is fixed. All of the bids at the fixed price and above get shares. Thus, if you think that there are chances that a particular IPO might be in a high demand, i.e. the IPO might be over-subscribed; it's always prudent to bid for shares at the cut off price. If you choose the cut off price option while bidding for shares, you will get shares at the cut off price determined later on.

But, what happens when more number of bids is received than there are shares? The company then divides up the shares among bidders.

Unsubscribed IPO

Case Of Under subscription : IPO prices are often lowered in such cases in order to ensure the issue is fully subscribed by investors, even if it results in the issuing company not raising the expected capital. The affected company has another option. Before the IPO process commences, they can get into an agreement with their underwriters stating that the latter would be required to buy unsold shares in case of under subscription.

Reasons : There can be various reasons for an undersubscribed IPO such as lack of awareness of the IPO, high pricing, poor marketing of the IPO and market conditions. Many investors also stay away if they spot any problems/irregularities with the company.

Minimum Subscription : According to SEBI, every company needs a minimum subscription of 90% of the issued amount on the date of closure. If not, the company refunds the entire subscription amount it received. There is no loss to the investors as the money they invested will be returned to them. The issuing company will not receive any money though.

Avoiding Undersubscribed IPOs : First, check the grade assigned by SEBI to the company floating an IPO. The grading is done on a 5-point scale. The grade will be high if the company’s financial condition is in good stead and compares well to its competitors in the market.
Second, it is always advisable to go through the company’s red herring prospectus in detail. The document, which is uploaded on SEBI’s website, provides a range of information about the company’s financials, future plans, among others.

Shares Allotment : Since demand for IPO shares is lesser than the shares supplied, every bidder receives the full allotment. Say, an investor had bid for 10 lots of shares. If the IPO is undersubscribed, she’d get all the lots she had applied for.

Losses after Listing? : Listing gains can be described as the difference between the allotment price at the time of the IPO and the stock price on the opening day at the stock exchange. If the opening day’s stock price is higher, the difference is known as listing gain. Usually, oversubscribed IPOs tend to make gains on the opening day at the stock exchange. The undersubscribed IPOs, meanwhile, rarely record listing gains. But that’s not to say the stock is condemned to underperform throughout. These stocks can bounce back over time due to better confidence in the market, healthy financial state and conducive market conditions

IPO oversubscription

It is said an IPO oversubscribed when the number of shares that investors want to buy is higher than the number of shares available in the stock exchanges. To put it simply, oversubscription occurs when the number of shares supplied by a company is not enough to meet the demand.

When a company decides to go public, underwriters assess the market to gauge the potential interest of the investors. During this process, there is always a chance of underwriters underestimating the interest in the IPO and price it lower than the market would actually pay for. This result in the demand for shares exceeding the number of shares issued. For example, a fixed number of shares offered in an IPO is, say, 10,000 shares. A ten-time oversubscription means investors’ demand is about one lakh shares. If the demand for an IPO exceeds the supply, the issuing house can charge a higher price resulting in more capital raised for the issuer.

In this scenario, underwriters can exercise the greenshoe option. The greenshoe option allows underwriters to issue 15% more shares than officially planned.

How Are Shares Allotted When An IPO Oversubscribed?

Every subscriber has encountered a situation where an IPO oversubscribed. So, let’s take a look at how companies allot shares in such times.
The allotment of shares is done by predefined rules laid down by Securities and Exchange Board of India (SEBI).
In every IPO, investor categories are distinguished and a percentage of shares are allotted to every category.

Qualified institutional investors

Non-institutional investors

Retail investors (who have invested less than Rs 2 lakh)

There could be an employee’s category as well.

The process of allocating shares is different for every investor category. While 50% of shares are allocated to qualified institutional investors, nearly 35% of the shares are allotted to retail investors.

Greenshoe Options

Underwriters play a crucial role in this case. Since they work on a percentage basis, underwriters want IPOs to rise as much as capital as possible. So, if the stock price surges, underwriters buy extra stock from the company — up to 15% — and sell it to the public at a profit. Underwriters usually buy stock at a predetermined price. On the other hand, if the price is dipping, they buy back shares from the public. This option helps stabilize the pricing of the share without incurring any loss to the investors.

LISTING FORMALITIES

Once the bidding process is over, the underwriter or the investment banker checks if the issue has been oversubscribed or undersubscribed.
If it is oversubscribed, the banks release the shares at the highest price band. The share is then listed.

VERIFYING ASBA

SEBI has made it mandatory for all investors to pay for the shares via ASBA (Application Sup-ported by Blocked Amount).

The investors have to write their bank account numbers and authorize the banks to make payment in case of allotment. The investors need to simply sign the application forms.

For investors who have been allotted the shares, their accounts will be debited according to the number of shares they have been allotted

Please ensure that you have carefully read the Risk Disclosure Document (RDD) as prescribed by SEBI.

We do not share client details with any third party and do not sell any tips or recommendations. In case anyone calls you posing as a Moneywise Finvest Limited executive, offering/inducing you to trade, please send us an email at contact@stoxkart.com

Disclaimer: Investment in securities and commodities market are subject to market risks, read all the related documents carefully before investing. IPOs and Mutual Funds distribution services are provided by Moneywise Finvest Limited.

"Prevent un-authorized transactions in your account Update your mobile numbers/email IDs with your stock brokers and depository participants. Receive information of your transactions directly from Exchange or Depository on your mobile/email at the end of the day. Issued in the interest of investors" "KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary." "No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account." Brokerage charged will not exceed maximum limit as prescribed by SEBI.